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1 Zacks Small-Cap Research Sponsored Impartial - Comprehensive May 2, 2018 Lisa Thompson lthompson@zacks.com scr.zacks.com 10 S. Riverside Plaza, Chicago, IL O2Micro International Ltd (OIIM-NASDAQ) OIIM: Business Is Back to Normal as Component Shortages End, Expect Growth Acceleration Using an industry average value to trailing 12-month sales of 5.5 times and OIIM s $59.4 m trailing 12-month revenue, we would calculate an enterprise value of $329, a market cap of $374 m and a price of $14.12 per share, if the company could reach breakeven. OUTLOOK O 2 Micro International is a fabless semiconductor firm that designs, develops and markets high performance integrated circuits primarily for power management and battery management for TV backlighting, LED lighting, and portable tools and appliances and smartphones. It had had declining revenues, but has reported revenue growth in the two years. It has struggled to reach profitability and cash flow breakeven. The company trades at a negative enterprise value of $9.9 million, well below the value of its non-cash assets. Current Price (05/01/18) $1.33 Valuation $14.12 SUMMARY DATA 52-Week High $ Week Low $1.33 One-Year Return (%) Beta 0.03 Average Daily Volume (sh) 30,520 Shares Outstanding (mil) 25.7 Market Capitalization ($mil) $34 Short Interest Ratio (days) N/A Institutional Ownership (%) 42 Insider Ownership (%) 8 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) -7.0 Earnings Per Share (%) N/A Dividend (%) N/A P/E using TTM EPS N/A P/E using 2018 Estimate -6.8 P/E using 2019 Estimate Risk Level Type of Stock Industry ZACKS ESTIMATES Average Small-Value Elec Comp-Semis Revenue (in millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 13.2 A 14.4 A 15.9 A 57 A A 14.5 A 15.5 A 15.2 A 60 A A 15.0 E 16.5 E 17.5 E 63 E E Earnings Per Share (non-gaap EPS before non-recurring items) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) $0.08 A -$0.06 A -$0.04 A $0.01 A -$0.16 A $0.04 A -$0.04 A -$0.04 A -$0.06 A -$0.18 A $0.09 A -$0.06 E -$0.02 E -$0.01 E -$0.15 E $0.00 E Zacks Projected EPS Growth Rate - Next 5 Years % 8 Copyright 2018, Zacks Investment Research. All Rights Reserved.

2 WHAT S NEW Growth Expected to Accelerate Throughout the Year O2Micro reported Q revenues of $14.1 million, down 7.3% sequentially, within the range of guidance of down 2-8%. This is typical seasonality from Q4 to Q1. It is the second down quarter for the company after its string of five straight quarters of revenue growth. Guidance for revenue for the second quarter of 2018 is sequentially up 2-10% from Q The midpoint in revenue guidance would result in revenues being up 3% from a year ago. While the first half of 2018 looks weak compared to the first half of 2017, it is more of a case of 2017 being an unusual year with industry component shortages and inventory affecting the normal course of business. O2Micro expects this year to be more typical as shortages have been mostly eliminated. Q2 this year is seeing stronger growth in battery management as it has a more diverse customer base. In the past this business was heavily dependent on power tools that are very seasonal and this year there is more demand from e-bikes, e-vehicles, vacuums, and UPS power supplies. The company continues to project cash breakeven at $ million in quarterly revenues and profitability at $17-19 million. Gross margin was 51.7%, up sequentially (from 51.2%) but down year over year (from 52.7%) due to lower revenues and product mix. Operating expenses in the quarter were $9.8 million versus $9.1 million last year and $9.4 million in Q The increase versus last year was entirely due to increased R&D expense. Operating losses increased to $2.5 million in Q from $1.2 million a year ago, due both to lower revenues and increased spending. In the quarter the company took an unrealized gain of $9.8 million on a long-term investment. This gain was from ownership of the stock of Excelliance MOS Corp. (5299.TWO) a private company that went public on January 23, Because of this gain the company reported positive net income of $7.2 million versus a loss of $1.5 million last year. This yielded fully diluted GAAP EPS of $0.27 versus a loss of $0.06 a year ago. Non-GAAP net income was a loss of $2.0 million versus a loss of $1.0 million last year. The company reported non-gaap EPS loss of $0.06 versus a gain of $0.01 last year. Non-GAAP EPS was a loss of $0.06 versus a loss of $0.04 in At March 31, 2018, the company had $45.1 million in cash and equivalents (or $1.73 per ADS), down $1 million sequentially. The company expects to be cash flow breakeven in the second half of this year, but not for the full year. Business Units Intelligent lighting is experiencing more design wins with its new product line and continues to see higher volumes ordered. The shortage of large panels for televisions ended, and there is only limited silicon shortages. The market for televisions continues to improve, especially at the high end where manufacturers make all their money. In addition, O2Micro continues to add new backlighting customers in industrial and automotive markets. In general lighting there has been modest growth particularly in the company s free-dimming products. Zacks Investment Research Page 2 scr.zacks.com

3 Battery management is the company s second largest sector and fastest growing as the industry continues to move to lithium ion batteries. Customers selling products such as e-bikes, e-vehicles, and vacuums and UPS power supplies are making the business less cyclical than when most of the product went to power tools. The company is providing the industry with more cost effective products, as well as more complex patent protected products for high end solutions. Power Products continue to expand its product line and increase its design wins. It is growing after several years of declining revenue as smartphones and tablets offset the decline in notebooks. In particular the market is interested in O2Micros fast charging solutions that result in less heat generation. It two products, a double charge design and an express charge for use in an A/C adapter that are now in preproduction. The company s products are now designed into between 6-8 smartphone manufacturers including BDK, Coolpad, HCT, and Coosea. VALUATION Company Has Significant Upside If It Can End Cash Burn The company trades at a negative enterprise value of $9.9 million. Last year the company looked as if it had turned the corner and was approaching profitability but panel shortages for TVs nixed that progress and the valuation of the company slipped again. Now it looks like these shortages have ended and business has been mostly normalized. At the end of Q1 2018, the company had $45.1 million (or $1.73 per ADS) in cash and equivalents, no debt, and valuable real estate in China and California. In California it owns a 37,180 square foot building where it has its USA operations, which was bought for $4.6 million in May 2004 and believe it is now worth approximately $7 million. Plus it also owns other real estate in China. Also on the balance sheet are long-term investments in other companies, including at least $9.8 million in stock in Excelliance MOS. The company has a very high liquidation as well as acquisition value. Activists had tried to encourage a transaction with an acquirer, but the company has no interest in a sale and due to restrictions, it is difficult to force one. Two of the comparable companies we had been using, Intersil and Linear Technology, were acquired at very high valuations. Intersil was acquired by Renesas for $3.2 billion at a valuation of 5.9xs the company s trailing $542.1 million in revenue. Analog Devices acquired linear Technology for $14.8 billion. This is 9.9 times its trailing four quarters of revenue of $1.5 billion. Were we to use the average enterprise value to trailing twelve-month sales of 5.5 times and apply it to OIIM s trailing 12-month $59.4 million revenues, we would calculate an enterprise value of $329 million. Adding to it $45.1 million in cash gives us a market cap of $374 million or $14.12 per share. We believe that once the company shows sustainable revenue growth and cash breakeven, the market should afford it a valuation closer to this price. We expect cash flow breakeven in Q3 or Q4. Competitors EV TTM Sales EV/Sales Microsemi MSCC 9,240 1, Monolithic Power Systems MPWR 4, Cree Inc. CREE 3,480 1, Microchip Technology MCHP 24,370 3, Maxim MXIM 14,900 2, Texas Instruments TXN 101,430 14, Cirrus Logic CRUS 2,250 1, Average 5.5 Zacks Investment Research Page 3 scr.zacks.com

4 OWNERSHIP Grandeur Peak Global Advisors DNB Asset Management Renaissance Technologies Lloyd Ivan Miller III White Pine Capital Eidelman Virant Capital SSquared Technology Bank of America Fidelity Mgt & Research Other RISKS O2Micro has exposure several stagnant markets such as standard TVs and declining markets such as notebooks and smaller monitors. It is depending on free dimming and high power LED lighting, 4K TVs, battery management, and successful penetration of and volume sales to the smartphone market to give it meaningful revenue and margin growth. At present the high-end TV and smartphone markets have been supply constrained, limiting O2Micro s ability to grow in these markets. It may be difficult for the company to capture market share in smartphones and tablets as a new entrant in an established field competing primarily with giant Texas Instruments and other larger firms. The firm is currently not at GAAP breakeven, is still cash flow negative, and has only started to stabilize revenues after years of declines. Given its large number of patents, litigation risk is a possibility as the company enforces its patents. Zacks Investment Research Page 4 scr.zacks.com

5 INCOME STATEMENT REVENUE Net Revenue Yr-to-yr Gr. OPERATING EXPENSES Cost of goods sold Gross Margin % of Sales R&D SG&A One-time expenses & Adj. Tot Operating Exp. Operating Income Interest income Unrealized fair value on LT Investments Foreign exchange loss Gain on sale of real estate Other (rent) - net Total other Income Pretax Income Pretax margin Taxes Tax Rate GAAP Net Income Non-GAAP Net Income GAAP EPS-Basic GAAP EPS-Fully dil. Non-GAAP Share Out Fully diluted shares Yr-to-yr Gr. March June Sept Dec March June Sept Dec Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18E Q3 18E Q4 18E -7.3% % 10% 7% -4% -6% 3% 6% 15% % 50.9% 50.3% 50.5% 51.2% 50.2% 52.7% 54.3% (1.2) (1.6) (1.7) (1.8) (2.5) (2.1) (1.0) (0.3) (0.2) (0.0) (0.2) (1.2) (1.2) (1.1) (1.6) 7.5 (1.7) (0.6) % -8.3% -7.4% -10.2% 52.8% -11.4% -3.5% 0.8% % -19.1% -20.0% -21.2% 3.6% -14.7% -51.9% 202.7% (1.5) (1.4) (1.4) (1.9) 7.2 (2.0) (0.9) (0.2) (1.0) (1.1) (0.985) (1.5) (2.2) (1.6) (0.4) 0.3 ($0.06) ($0.06) ($0.05) ($0.07) $0.28 ($0.08) ($0.03) ($0.01) ($0.06) ($0.06) ($0.05) ($0.07) $0.27 ($0.08) ($0.03) ($0.01) ($0.04) ($0.04) ($0.04) ($0.06) ($0.09) ($0.06) ($0.02) $ % 1% -1% -1% 2% 0% 1% 1% E 2019E % 6% 5% 11% % 51.1% 52.2% 52.9% (0.0) (0.0) (5.9) (6.2) (5.9) (2.1) (0.2) (1.9) (5.1) 5.3 (0.4) -3.4% -8.5% 8.4% -0.6% % -19.7% 21.0% % (3.0) (6.1) 4.2 (1.6) (4.4) (4.6) (3.9) (0.0) ($0.12) ($0.24) $0.16 ($0.06) ($0.12) ($0.24) $0.16 ($0.06) ($0.16) ($0.18) ($0.15) ($0.00) % 1% 3% -4% Zacks Investment Research Page 5 scr.zacks.com

6 BALANCE SHEET March 31, Dec 31, CURRENT ASSETS Cash and cash equivalents $25,417 $28,520 Restricted cash Short-term investments 19,695 17,601 Accounts receivable, net 8,043 9,184 Inventories 9,662 9,330 Prepaid expenses and other current assets 1,685 1,245 Total current assets 64,538 65,915 Mar-Dec % Change -10.9% 2.9% 11.9% -12.4% 3.6% 35.3% -2.1% March 31, Yr-to-Yr 2017 % Change $27, % % 23, % 6, % 9, % 1, % 68, % LONG-TERM INVESTMENTS 12,849 3,112 PROPERTY AND EQUIPMENT, NET 13,751 13,755 OTHER ASSETS 2,232 2,300 Total other assets 28,832 19,167 TOTAL ASSETS 93,370 85,082 CURRENT LIABILITIES Notes and accounts payable 3,290 2,460 Income tax payable Deferred tax liabilities 0 0 Accrued expenses and other current liabilities 3,761 4,379 Total current liabilities 7,343 7,180 OTHER LONG-TERM LIABILITIES Accrued pension liabilities Deferred tax liabilities 1, Other liabilities Total long-term liabilities 1,458 1,347 Total liabilities 8,801 8,527 SHAREHOLDERS EQUITY Ordinary shares Additional paid-in capital 142, ,946 Retained earnings (accumulated deficits) (40,702) (47,517) Accumulated other comprehensive income 6,014 5,337 Treasury stock (22,904) (24,244) Total shareholders equity 84,569 76,555 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 93,370 85,082 Cash and equivalents $45,112 $46,121 Change in cash and equivalents (1,064) (55) Market value 35,214,410 42,434,700 Enterprise value (9,933,590) (3,721,300) DSO Inventory Days % 0.0% -3.0% 50.4% 9.7% 33.7% -14.4% -14.1% 2.3% 0.8% 11.7% 2.3% 8.2% 3.2% 0.0% -0.6% -14.3% 12.7% -5.5% 10.5% 9.7% -2.2% % -17.0% 166.9% 1.9% 4.2% 4, % 13, % 2, % 20, % 88, % 3, % % 0 3, % 6, % % % % 1, % 8, % % 141, % (42,829) -5.0% 5, % (23,921) -4.3% 80, % 88, % $50, % (2,368) -55.1% 64,600, % 14,070, % % % Zacks Investment Research Page 6 scr.zacks.com

7 ANNUAL CASH FLOW 12 Months Ended December 31, OPERATING ACTIVITIES Net loss $ (6,145) $ (2,986) $ (21,095) $ (15,057) $ (19,099) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,667 1,682 2,446 3,718 4,685 Stock-based compensation 1,589 1,606 1,912 2,120 2,609 Loss on asset write-off Inventory write-downs 642 1, , Gain on sale of long-term investments (20) (948) (8) (436) Impairment loss on long-term investments 0 0 4, Gain on disposal of property & equipment, (137) (1,726) (738) (428) (106) net Deferred income taxes 40 (1,231) 1, Other, net (36) (1) Changes in operating assets and liabilities: Accounts receivable, net (1,979) (2,008) 1,592 3,235 (1,251) Inventories (697) (1,140) (1,933) (2,963) (200) Prepaid expenses and other current assets (139) (6) Deferred charges (553) (375) (416) (985) (1,366) Notes and accounts payable (1,869) 996 1,202 (2,038) 413 Income tax payable 161 (2,065) 1, (124) Accrued expenses and other current 186 (1,064) (1,039) 577 (1,083) liabilities Accrued pension liabilities 13 (4) (11) (12) (25) Other liabilities 3 (56) (168) (346) (8,893) Net cash used in operating activities (7,238) (7,798) (8,615) (10,328) (22,990) Acquisition of: Short-term investments (8,505) (28,797) (7,128) (22,346) (15,496) Long-term investments 0 0 (250) Property and equipment (704) (673) (724) (1,004) (743) Decrease (increase) in: Restricted assets ,000 Restricted cash (1) 1 Other assets Proceeds from: Sale of short-term investments 12,635 18,331 16,755 34,333 52,131 Sale of long-term investments 0 5, ,304 0 Return of capital from LT investment 1, Disposal of property and equipment 145 3,837 3,205 1, Net cash provided by investing activities 4,756 (1,263) 12,859 14,384 45,917 FINANCING ACTIVITIES Acquisition of treasury stock (708) (619) (3,233) (4,965) (8,279) Proceeds from: Exercise of stock options Issuance of ordinary shares under the Employee Stock Purchase Plan Net cash used in financing activities (595) (544) (3,022) (4,663) (7,919) EFFECTS OF CHANGES IN FOREIGN 265 (262) (1,092) (617) (613) EXCHANGE RATE NET INCREASE (DECREASE) IN CASH AND (2,812) (9,867) 130 (1,224) 14,395 CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT 31,332 41,199 41,069 42,293 27,898 BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT END OF 28,520 31,332 41,199 41,069 42,293 THE YEAR SUPPLEMENTAL DISCLOSURES OF CASH FLOWS Cash paid for tax $ 818 $ 4,349 $ 1,068 $ 697 $ 1,064 Cash Flow (2,364) (2,076) (9,628) (8,338) (10,971) Free cash flow (3,068) (2,749) (10,352) (9,342) (11,714) Zacks Investment Research Page 7 scr.zacks.com

8 HISTORICAL STOCK PRICE Zacks Investment Research Page 8 scr.zacks.com

9 DISCLOSURES The following disclosures relate to relationships between Zacks Small-Cap Research ( Zacks SCR ), a division of Zacks Investment Research ( ZIR ), and the issuers covered by the Zacks SCR Analysts in the Small-Cap Universe. ANALYST DISCLOSURES I, Lisa Thompson, hereby certify that the view expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report. I believe the information used for the creation of this report has been obtained from sources I considered reliable, but I can neither guarantee nor represent the completeness or accuracy of the information herewith. Such information and the opinions expressed are subject to change without notice. INVESTMENT BANKING AND FEES FOR SERVICES Zacks SCR does not provide investment banking services nor has it received compensation for investment banking services from the issuers of the securities covered in this report or article. Zacks SCR has received compensation from the issuer directly or from an investor relations consulting firm engaged by the issuer for providing non-investment banking services to this issuer and expects to receive additional compensation for such non-investment banking services provided to this issuer. The non-investment banking services provided to the issuer includes the preparation of this report, investor relations services, investment software, financial database analysis, organization of non-deal road shows, and attendance fees for conferences sponsored or co-sponsored by Zacks SCR. The fees for these services vary on a per-client basis and are subject to the number and types of services contracted. Fees typically range between ten thousand and fifty thousand dollars per annum. Details of fees paid by this issuer are available upon request. POLICY DISCLOSURES This report provides an objective valuation of the issuer today and expected valuations of the issuer at various future dates based on applying standard investment valuation methodologies to the revenue and EPS forecasts made by the SCR Analyst of the issuer s business. SCR Analysts are restricted from holding or trading securities in the issuers that they cover. ZIR and Zacks SCR do not make a market in any security followed by SCR nor do they act as dealers in these securities. Each Zacks SCR Analyst has full discretion over the valuation of the issuer included in this report based on his or her own due diligence. SCR Analysts are paid based on the number of companies they cover. SCR Analyst compensation is not, was not, nor will be, directly or indirectly, related to the specific valuations or views expressed in any report or article. ADDITIONAL INFORMATION Additional information is available upon request. Zacks SCR reports and articles are based on data obtained from sources that it believes to be reliable, but are not guaranteed to be accurate nor do they purport to be complete. Because of individual financial or investment objectives and/or financial circumstances, this report or article should not be construed as advice designed to meet the particular investment needs of any investor. Investing involves risk. Any opinions expressed by Zacks SCR Analysts are subject to change without notice. Reports or articles or tweets are not to be construed as an offer or solicitation of an offer to buy or sell the securities herein mentioned. Zacks Investment Research Page 9 scr.zacks.com